Sunday, December 26, 2010

A little holiday hiatus. And I am going to get my nose back on the grindstone! Just maybe not today (Sunday). Apropos of nothing my Mom got me a full spectrum light to ward off the mid-winter blues. And speaking of Blue this is a picture of my U of Calif Berkeley alter ego enjoying that light.

Tuesday, December 21, 2010

In Part One of this post I discussed the danger that the 2% 'temporary' payroll tax cut might be a Trojan Horse destined never to expire in full or at all only to have any continuing backfill from the General Fund (by then surely to be described as a 'subsidy') subject to an ongoing series of 'compromises' that gradually phase in benefit cuts rather than take the whole thing at one gulp.

In Part Two I want to discuss a quite different threat. In this scenario the employee share of the payroll tax is allowed to reset to it 6.2% but as a seeming sweetener taxpayers will be allowed or perhaps required to divert it into a Personal Savings Account with the explanation that it really wasn't a tax increase at all! Nope the money is still 'yours', just tucked away for your own future use rather than being co-mingled in the Trust Funds where you don't have an ownership interest at all, why the Supreme Court said so in Flemming .v. Nestor. Well a visit to the link shows that this doesn't mean what opponents often take it to mean, and the idea that the PRAs would be in any fundamental sense different is illusory, but before getting to that I want to point out a curious coincidence (or not). The 2% payroll tax holiday is the same amount of diversion proposed in most straight PRA proposals out there. Cynical people might suggest that this number was not just plucked out of the air, or back computed to approximate the typical effect of the expiring Make Work Pay tax credit which it is replacing, but instead to put in place elements of say Obama advisor Jeff Liebman's Liebman-MacGuineas-Samwick Non-Partisan Social Security Reform Plan or even the more recent Galston-MacGuineas Plan which has a mandatory diversion of exactly this amount.

I had a long day of Social Security related blogging and assignments and need to get this cross-posted so I'll leave it here for now. Comments on PRAs generally or Galston-MacGuineas specifically are certainly in order.

Monday, December 20, 2010

As part of the Tax Cut deal Obama cut with Republicans there was included a one-year cut of 2% of payroll out of the 6.2% employee share of the overall 12.4% of payroll sent to Social Security. This cut was ostensibly designed in a way that held harmless the Trust Funds, the dollars not being sent from paychecks instead being replaced by transfers from the General Fund. Plus the diversion is on paper only temporary. But in reality this deal not only should have raised red flags, it also should have blown reveille and set off the disaster warning klaxons. This deal represents a terrible danger to Social Security in at least two ways and is terrible policy besides.

If the so-called Payroll Tax Holiday stood on its own, you could argue that it is mildly progressive in that for one year it reduced the taxes of everyone on their first $106,800 of income while paying for it out of taxes that are mostly incident on the top 50%. Unfortunately it effectively replaced the expiring Making Work Pay tax credit which directed all of its benefits to families making at most $70,000. The net result may be a tax hike for as many as one in three workers. The whole grim business is described in this Huff Post piece: Obama-Republican Deal Could Mean Tax Hike For One In Three Workers by the appropriately named Ryan Grim. From my point of view the fact that the tradeoff was suggested by Republicans is all you need to know, millionaires will get a tax cut ten times of that of a single person working at FPL in a minimum wage job.

However this particular issue, however important from an economic justice and income inequality standpoint is somewhat peripheral to Social Security itself. And there are plenty of people more qualified than me to comment on it, starting with Mr. Grim, so over to them on this one. Instead I want to discuss two threats posed to Social Security, one that just brings the funding shortfall much closer in time and is pretty well recognized, and a second that is more subtle but presents an existential threat to Social Security itself.

The first threat is fairly simply stated: in today's Washington D.C. there is no such thing as a 'temporary' tax cut. As long as Republicans have anything to say about it (and since they are effectively calling the shots even before they take control of even the House) there is no such thing as restoration of existing levels of taxation after a 'tax holiday', instead any such cuts will be presented as a tax increase, in this case a massive one. Because they can and will play games with percentages. That is while the cut is presented as 'only' 2% and so to reasonable minds would seem a small part of the revenue flow, it represents 16% of the total revenue flow generated by FICA payroll tax and a whopping 32% of that taken out of workers' paychecks. Moreover taking the employee share simply back to 2010 levels means an increase from 4.2% to 6.2% or a whopping 47% TAX INCREASE. That is you can expect Obama to get headline credit for a 2% cut but get blamed for a near 50% increase even though it is the same dollars in question.

The anticipated rhetorical spin is only the start of the danger. Social Security Title 2 (what we know as Soc Sec today) has always been a closed system, to paraphrase Lincoln 'of the worker, by the worker, and for the worker', having taken nothing directly from capital it owed nothing to capital. Moreover because of the way that its dedicated taxation and later benefit levels were set up it was largely insulated from the Budget and Appropriations process. While opponents of Social Security could and did play games with the 1% of cost related to Administration, an amount that is exposed to those processes, that game playing didn't put the whole system at risk (though it caused a lot of misery on the Disability Insurance side, where Admin has always been scandalously underfunded). But in 2011 a very substantial chunk of Social Security income will come from the General Fund. And while it is always possible that the next Congress will just ease that General Fund burden by letting the 'holiday' lapse on schedule there is no guarantee that they wouldn't simply leave the 4.2% rate in place while cutting the subsidy from the General Fund and so blowing around a $120 billion hole in the income stream for 2012 and every year after. With the net effect of bringing the projected date of Trust Fund depletion back dramatically from its current 2037 date, perhaps as early as 2020.

Of course this might appear just too raw and hypocritical for the Republicans, that after crying 'crisis' they did what they could to precipitate it, but it opens the door for other chicanery. For example the Republicans could offer to leave the 4.2% rate in place, lower the replacement subsidy by 50% and 'compromise' by cutting future benefits in a way that offsets the other 50%. And then just repeat this exercise every year in their typical framing of separating "spending we CAN'T afford" (which always seems to be social spending) from "spending we can't NOT afford" (which seems to be everything military and any efforts to raise revenues).

Social Security has been protected throughout its history by the wall represented by a dedicated payroll tax and a Trust Fund whose reserves were drawn from that same stream. This Administration just breached that wall, apparently in the futile attempt to show 'seriousness' and 'bipartisanship' which in this case translates to 'willingness to screw your own base'.

This payroll tax holiday was a terrible policy choice to start with, continuation of Making Work Pay or direct transfers from the General Fund to workers would have been more effective and better targeted stimulus than a tax cut that also flows to millionaires. But the danger is not restricted to the direct breach in the wall. Instead there is a lurking Trojan Horse. Subject of Part Two.

Sunday, December 19, 2010

Well like Santa I'll be "making a list and checking it twice" and then naming names. Because one function of this project is to act as a clearinghouse to push back on the organized groups and think thanks that are leading the charge for 'reform' of Social Security. But in this post I just want to call out some categories. Because the motivations are not all the same even as they overlap and if you had to call out some key words it would be the three 'S's: socialism, simoleons, sustainability.

Socialism: There are a number of folk who simply oppose government run social and economic programs. Throwing out some labels this would include many Burkean Conservatives, Constitutional Originalists, Libertarians of all stripes and particularly those who ally themselves with the Austrian School. Their objects range from the purely philosophical to operational 'slippery slope' arguments (The Road to Serfdom (by Friedrich von Hayek), but mostly their argument boils down to a simple equation: Socialism = Redistribution. This is often but not always overlayed with an argument with Calvinist roots, that charity should be voluntary and directed to the 'deserving' poor, and not the 'undeserving' poor who we could identify as Marx's Lumpenproletariat. But there are plenty of atheists in this group as well, it is here that you will find followers of Randian Objectivism.

With this group two typical push back methods are totally ineffective, one being appealing to that brand of Christian and other faith thought that finds an exemplar in the Sermon on the Mount and the other any argument that the cost of saving Social Security as is, or following Prof. Jamie Galbraith, the late Bob Ball, and others of enhancing its benefits. On the religious front they are either indifferent or have it covered via voluntary charity to the 'deserving' and on the economic front their problem is not that Social Security is going broke or that its benefits are too skimpy but that the program exists at all. Now theoretically you can get to this group by proving that current methods for original distribution of the gains from productivity are unfair and that methods to redress that are akin the governments power to enforce property rights. And in taking this approach you could take advantage of the fact that a substantial sector of this group has always been distrustful of Central Banking and bankers in general. By and large though this is a hard headed lot and have combined elements of Calvinism, Horatio Alger, and Milton Friedman into a belief that Capitalism works if you do, that in almost all cases you can and should provide for your own economic well being through savings and investment. Which is why they generally favor a transition away from traditional Social Security to some form of personal/private retirement accounts.

Simoleons. One school of thought among the defenders of Social Security believe that in the end this is all being driven by Wall Street, that the Masters of the Universe are driven to near madness seeing a huge stream of money flowing over which they have no control and for which they would love to charge fees. Often this is posed in the form that they covet the $2.6 trillion in assets in the Social Security Trust Funds. Personally I have never put much stock in this theory. For one thing it relies on a misunderstanding of the nature of those assets, and ignores the projected state of cash flow going forward.

Now there was a time when this was a viable strategy. In 1993 the changes to Social Security implemented pursuant to the Greenspan Commission compromise had restored the system to its official measure of short-term solvency, a Trust Fund Ratio of 100, meaning reserves of Treasuries equal to one year of projected cost. (The following table from the 2010 Report is worth extended study, I will be returning to it again and again: Table VI.A4.— Operations of the Combined OASI and DI Trust Funds, Calendar Years 1957-2009). 1993 market the point when Social Security entered what was projected, and eventuated, as a 20+ year series of primary surpluses, meaning receipts from contributions and taxation and excluding interest, i.e. actual cash flow, in growing excess of cost. This window was always projected to close as the large demographic cohort of Boomers reached Early Retirement eligibility starting in 2008, and Full Retirement eligibility starting 2012, but in the meanwhile there was an opportunity to invest those primary surpluses in other asset classes with returns that under some optimistic forecasts would exceed those of interest on Treasuries sufficient to justify the fees extracted by account managers. Whether this would have actually worked has been a subject of on-going debate since then but the operative words are 'was' and 'would', not only has that window largely closed the current downturn made the cloture a little faster, for all practical purposes the days of primary surpluses are over and with them the possibility of extracting large fees from Personal Accounts. Which explains why most of the current pressure on Social Security for private accounts is not being led from Wall Street, but from ideologically driven think tanks and individuals. The Cash Cow has dried up.

Sustainability. Historically Social Security has been extraordinarily popular among the population at large, so much so that it gained the appellation of "The Third Rail of American Politics": touch it and you die. This meant that direct attacks on it along the lines suggested in 'Socialism' above mostly did not resonate except among the true believers. And the argument for Privatization outlined in 'Simoleons' collapsed in the course of the 2005 Bush's 'Social Security Tour's failure in the light of the There is No Crisis, and was sealed with the economic collapse starting in 2007-2008. Which has required an almost total shift among opponents of traditional Social Security to what was a primary line of attack all along, that however popular and well-intended Social Security might have been, its benefits were over generous looking back and unaffordable going forward. Well both of those propositions are doubtful on examination, and the good will of those pushing them are to say the least suspect, it being pretty clear that most people in the 'Unsustainable' camp are really driven by one or the other of the two 'S's above. Subject of future posts.

Thursday, December 16, 2010

My first foray into Social Security blogging (as opposed to commenting on other blogs) was with the launch of The Bruce Web in Nov 2004, or immediately after then President Bush announced he was going to use his "capital" to "reform" Social Security. The Bruce Web was mostly designed as a place to stash links and to work out some of my thinking, but the result was kind of a mini-course on Social Security finance as it looked at the time. The economic outlook is a lot different today and I won't be writing the new series of posts in quite the same way, but the fundamentals haven't changed and new students of Social Security could do worse than checking out the: 2004 archives including the one that explains how I got onto this topic to begin with: Trust Fund Exhaustion: a Personal Odyssey.

From 2004 through the 'There is No Crisis' movement of 2005 right to 2008 I was an active participant in every Social Security thread on every political and economics blog I ran across, and in time built enough cred that in May 2008 I was invited to write a Social Security series for the econoblog Angry Bear. The immediate result of that was a series of 44 numbered posts that I indexed back on my own site: Angry Bear Social Security Series

One main purpose of this new site is to rework the Nov 2004 and May-June 2008 series in light of the new (and grimmer) realities of the current recession/depression. Social Security is STILL not broken, but it CAN be broken by its enemies, and the push back against that is really what this site will be all about.

Wednesday, December 15, 2010

Well I secured a small grant that will allow me to take this site and the overall effort to the next level. I don't know if this site will remain as a stand-alone blog or whether it will be effectively ported over to a bigger stage, for example at the upcoming dKos 4 blogging platform.

The next steps are to launch Social Security 101 and to steal a phrase from Atrios to "document the atrocities on right economic websites. But before that I am going to go out and upgrade my presentation and web design software to more professional standards.